DTL as part of net debt
Do you guys include existing DTLs in the EV equity bridge at entry and also substract when calculating exit proceeds if DTLs stay on the BS?
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Subtract at NPV
can you please elaborate
At entry assuming you don't write-down DTLs and you will keep them post-transaction they will go onto your balance sheet pro-forma, just like every other non-debt liability (accrued comp, AP, etc.) As the company already has DTL on its sheet, the book equity figure should already reflect its existence in order to balance A=L+E. Just proceed as normal. i.e. you aren't adding value by saying oh look there's a DTL; the book equity figure has already factored in the DTL existence via Assets - Liabilities.
So sponsor equity is still the plug as Total Uses - sum of non-sponsor equity sources. The value of the DTL is already part of the Total Uses (more specifically, under the Equity Purchase Price indirectly through the assets - liabilities representation).
At exit, you want to extract the Implied Equity Value. Here you have to subtract the DTL in addition to all debt-like items, along with Debt, in order to get the Equity Value. This is the EV bridge exercise you see a lot in investment banking interviews.
Why is there a difference between treatment of DTL in entry and exit? Because at exit, sponsor's exit value is simply the equity value of the company, while at entry, sponsor's entry value is not equal to the equity value of the company at the time, as you'll have to adjust for all types of fees and consideration in how much debt to finance the transaction with.
so at entry not substracting to arrive at equity value!
Did you even read the above? Don't have very high hopes considering you can't even spell "subtract" correctly...
Sorry but I'm struggling to follow this. Book assets and liabilities don't have much to do with sources and uses at either entry or exit (though they do have to do with purchase accounting - a separate topic). I sort of see what you are trying to get at where certain debt-like items reduce seller's equity value but have no impact to buyer's equity, but a DTL is not really one of them.
The typical treatment of taxes in an LBO is your watch / my watch (let's leave transaction tax deduction negotiations for another time). The buyer will reduce purchase price for unpaid tax liabilities for the period prior to close, and in this case, this is a true reduction in price (ie, less need for capital at close), however the buyer does foot this bill when those taxes become due. The focus is on cash taxes, not book DTLs.
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